European regulators are set to publish a consultation paper tomorrow proposing controversial new rules to restrict the activities of the banks’ dark pools, which anonymously match large buy and sell orders.
Brussels will outline the new restrictions as part of its long-awaited amendments to the Markets in Financial Instruments Directive (MiFID), which in 2007 opened up European share markets to cross-border competition and the advent of pan-European electronic multilateral trading facilities (MTFs).
The world’s largest investment banks have set up in the past three years two types of alternative trading venues: proprietary systems that match up client orders privately, known as dark pools, and exchange-like MTFs, which are more tightly regulated.
Together they have claimed up to a third of stock market trading activity in just three years.
Europe’s three main exchanges – NYSE?Euronext, the LSE and Deutsche Boerse – offer versions of dark pools but the main difference is in how these services are treated by regulators.
The exchange pools are regulated as quasi-exchange MTFs while the bank pools are currently treated as a function of the banks’ broking.
Many large investment banks operate their own dark pools, including Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, Nomura and UBS.
The European Commission will propose next week that the dark pools are regulated as MTFs if they exceed a certain size threshold, making the rules much stricter.
The Federation of European Securities Exchanges – which has been lobbying hard for the amendment, says that it will enable its exchange members and brokers to compete more equally.
The banks say the exchanges have exaggerated the size of dark pools in claiming that as much as 40 percent of European trading takes place away from exchanges, when the real number is much less than five per cent.